Have you got the right adviser?

7 sources of financial advice: Which are useful?

Here is a look at seven sources of advice and the likely impact these can have on your finances.

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1. Mutual fund distributors

Distributors can only give incidental advice and this is restricted to selecting MF schemes for investment. They do not charge a fee but earn commission from the higher expense ratio of regular schemes. They can be useful for small investors who can't afford fee-only advisers.

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2. Insurance agents

These agents help select insurance policies. While individual agents are tied to one company, corporate agents can sell products from multiple insurance companies. They also charge nothing and earn only from the commission. Do keep in mind that commission drives an agent's advice.

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3. Bank relationship managers

Most banks have relationship managers pushing mutual funds and insurance products. Although the advice is free of cost, the bank earns commission on investments. Banks are the biggest culprits when it comes to flawed investment advice, i.e., mis-selling.

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4. Stock brokers

In addition to providing a trading platform, brokers also recommend stocks to buy or sell. This advice is also free of cost but the broker earns brokerage every time you buy and sell. Many stock brokers have also started mutual fund and insurance distribution verticals.

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5. Wealth managers

There was a time when only those managing extremely large portfolios (over Rs 1 crore) were known as wealth managers. Now, even a portfolio of Rs 25 lakh will have a wealth manager. There is usually a fixed fee (25-50 bps of AUM a year) or variable fee (10-20 percent of the additional returns earned above a pre-determined benchmark). Some wealth managers even earn commissions on the products they sell.

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6. Fee-only advisers

As the name suggests, these advisers don't earn any commission from the products they recommend but earn a flat fee from the client. Since these registered investment advisers (RIAs) don't earn commissions, there is no conflict of interest. Make sure that your RIA doesn't run an insurance agency or mutual fund distribution in the name of relatives.

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7. Robo advisers

This new breed of advisers act as wealth managers for small investors. The advice (on asset allocation, fund selection, insurance plan) is doled out by computer algorithms and lacks a personal touch. The charges are between Rs 1,000 per annum (for pure robo advisory) and Rs 12,000 per annum (for customised personal advice).